Regular Way to Wealth

In an exclusive show on All India Radio, titled Market Mantra, Dhirendra Kumar, CEO, Value Research, answers listeners’ queries to help them make better and more informed decisions on investing their money. Here are the excerpts:

I have been investing in mutual funds for quite a long time. In the ongoing rally, would it be prudent to book some gains, or should I just continue with my investments and leave the profit-booking on fund managers.
Dr R.K. Manocha

No, I do not think you should trust the fund manager to book your profit. When you invested in the fund, you mandated the fund manager to remain fully invested in equity. A fund manager’s objective is not to time the market for you. They will remain fully invested and wouldn’t be unscathed in a correction. In the prospectus of most funds it is written that in extreme cases the fund managers can keep cash allocation of 35 to 40 per cent. But generally, fund managers do not want to keep this kind of high cash allocation. So you must book your own profit.
You should follow the rebalancing approach to book profit. Investors like you, who have been investing for a long time, should have a defined allocation of 10, 15 or 30 per cent in fixed income. In this kind of rally, fixed income allocation in the portfolio will decrease and for that you need to book profits in equity and invest the proceeds in fixed income.
If you follow this kind of rebalancing you will methodically book profits and put that money into fixed income. And when the markets fall, you will able to draw on your fixed income investments and buy more equity. If you are an existing investor then it can done every three months without much tax implication. And if you are a new investor, then you can do this after one-year.

I want to invest Rs 1 lakh in a mutual fund. I want to know how to go about investing this sum? I have never invested before.
Gyanender

If you do not pay tax then my suggestion to you would be to invest in a good balanced fund. Being a first time investor, the ups and downs in the market might give you a nightmare. For this select a good balanced fund, do not invest Rs 1 lakh in one go, spread this amount over the next one year. My recommendation would be to go for any of the balanced funds of UTI, Kotak or DSPBR.

There is a thought that in next few months the global economy is going to turn around. Would you suggest that I should invest 25 to 45 per cent of my savings in the market at this point of time.
Gyanender

No I don’t think so. A first-time investor after putting Rs 1 lakh in the market sees its value go down to Rs 80,000 will never invest again. For an investor getting started to manage his emotions and conduct his business in a manner that he is able to conduct with confidence, once he gets used to it, once his Rs 1 lakh gradually becomes Rs 1.2 lakh and then it comes down to Rs 1.08 lakh, then he won’t really be that upset. By following this method he will realize that how regular investing of a small amount can translate into significant wealth.
Because, for most people, investing is something that you need to do at certain points to achieve a big thing. I think investing is not as much about that, its doing a series of small things with regularity and keeping your anxiety in check. One should always look at superior risk-adjusted performance.

What was the reason for the fall in markets? Was it profit-booking?
Ashok

It is difficult to guess the daily movement of the markets. Considering what has happened in the markets for the past 4-to-6 weeks, the jury is still out on whether this is a bear market rally or is this rally sustainable. I think what has happened all over the world is very unconventional and this could very well be a bear market rally. It is still too soon for a recovery.
Investors should be happy with what has happened in the past few weeks. Looking at the fundamental factors like annual results, economic indicators, contraction in the technology sector, we really cannot confidently say this is a bull rally.
People are apprehensive about their future, they will buy less, and they won’t go rushing into buying a house. Furthermore, there is also an uncertainty on the political front. In this kind of a situation, people should be happy that the markets have turned around from very low levels. It has brought hope back for investors, but we shouldn’t be too optimistic.

There was a view that the stock markets would start correcting maybe from May 15, just ahead of the declaration of the election results, or perhaps from Monday, immediately after announcing the results. But now, it looks like we are going to have a correction.
Biren

I don’t think so, because many of the rallies, bear market rally, or market rally, are self-fulfilling. Market goes up and nobody participates, then some people come in because the market has gone up, then more people rush in. And in a very brief period of time you forget about the rules and you keep buying and that creates a frenzy.
I think a lot of investors have gone into the panic buying mode, thinking that they have missed an opportunity. They have lost so much, they want to recover it and they need to do it now. I think it is the wrong premise to get started. The lesson of this whole turnaround lies in what happened in 2008 and what happened six weeks back and that is, markets turn around when you least expect.
This is what makes it more interesting, but it is also what makes it more dangerous. This is the time when one should be formulating one’s own rules and not lose core focus. There are lots of stocks that are fundamentally very sound and available cheaply. I think investors should be guided by fundamentals and not get into a buying frenzy.

I have invested in Reliance Diversified Power Sector Fund (RDPSF) and in Reliance Regular Savings in January 2008. Last time I looked, RDPSF was still in negative terrain. How good are both these funds?
Sanjeev Mishra

Reliance Diversified Power fund is a sectoral fund. This kind of fund cannot be the first fund you buy. Reliance Regular Savings Fund is a good fund. This can form a part of your core holding. I think if one wants to invest in equity funds then one should not go about investing a lump sum in equity. And if possible, you should take out your money from RDPSF and put it into the Regular Savings Fund.

In the recently-launched New Pension Scheme (NPS), there is an Active Choice and Auto Choice. What are these and how should I go about choosing fund managers?
Bipin

In the New Pension System, Active Plan is for those investors who think they can better determine how much money should be in equity and in debt. But for most investors, I think the Auto Plan is more convenient, where with your age, your allocation to fixed income category automatically increases.
As for selection of fund managers, this is a new plan and there isn’t much of a history on fund managers to comment on. For the time being, I think they are all the same. I also do not think there would be much of a variance in the performance of different fund managers in the NPS. PFRDA has mandated that you can invest only in those shares that are in Nifty or Sensex. Hence, choice is going to be about 51 shares. Better understanding, or an inferior understanding, by a fund manager would hardly make a very big difference. In fixed income it is unlikely that the fund manager would be able to generate a very high alpha. The maximum variance in fixed income funds will be half a per cent to one per cent, moreover no one can say that the fund managers who have performed better this year will be able to repeat it next year. You can select any fund manager and go with the Auto Plan.

Can you tell me about SBI ULIP Smart Plan?
Pankaj Shridhari

I always say that unit-linked insurance plans (ULIPs) are not very good investments. Whenever you take a ULIP, then a part of your money is used to buy insurance for you and rest is invested. Normally this is a bit expensive way of investing. Not only can you not withdraw your money before three years, there is also hardly anything to evaluate this product. If you want to invest, then invest in a good mutual fund.

I shorted some shares on Friday, but I wasn’t able to square-up. What will happen now?
Sunil

Today, the market has fallen, and you should be in profit. But if you are going with this kind of strategy without much belief and knowledge, and you do not have a huge cash cache to carry on your belief and honour your transaction, then this is a dangerous strategy. What you are doing is nothing but gambling in a legitimate way. If you are investing without any knowledge and that too on the direction of the market, this is nothing but pure speculation. Speculation can be very dangerous and fortunately for you it may randomly turn-out to be very rewarding. My suggestion would be stay away from these kinds of things and before doing this kind of trade determine, at the maximum, how much you will lose. If you speculate in a way that can saddle you with unlimited liability, then you should stay away.

What is the difference between reinvestment and growth option? When one does one do it and what is the benefit?
Pranab

It does not matter whether you are choosing reinvestment or growth option. In case of dividend reinvest option, the dividend of the equity funds gets invested in the same equity fund at the next day’s NAV. If you are investing for periods less than one year then reinvestment can turn out to be more beneficial.